Tuesday, October 22, 2002

Moore's law and accounting

I think David Reed went to Harvard Business School, so perhaps he can be forgiven for not understanding accounting. In this article he claims that since telco equipment follows Moore's law and becomes obsolete quickly, depreciating it (in accounting terms) is wrong and leads to under investment.

First of all, accounting measures of depreciation don't drive business decisions (actually, accounting measures of anything don't drive business decisions much). I will talk more about the economics of durable goods in a future column, but essentially the way it works is that if a good depreciates rapidly (ie. the price for a one year old version of the good on eBay is *much* lower than the price of a new one) you better anticipate earning lots of money from owning that good to justify going out and buying it now.

In telco, the Telecom Act of 96 means entrants can freeride on capital investments made by incumbents, which has lead to neither making capital investments. Unfortunately for Reed, this will be fixed by giving back local monopolies to incumbent phone carriers, not a change in accounting rules. And I don't see him arguing for that.


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